S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Transportationand not available to other carriers if requestedby management;■ Not including the depreciation or capital costs ofPFC-financed project in the airline rate base; and■ Maintaining records and submitting reports inaccordance with federal regulations.In addition, Standard & Poor’s looks to specificcovenants, including the provision of all reports toensure compliance, investment restrictions, a 1.05xsufficiency covenant requirement to prevent airportfrom over committing PFCs, and immediate notificationof any delays in the collection of PFCs, or uponcontact by the FAA regarding possible violations.Open Lien Versus Closed LienHow PFC revenues collected in excess of annual debtservice requirements are applied can affect the rating.The strongest structure is one in which the lien isclosed, and surplus PFCs are used to redeem debt.This reduces the average maturity, thus minimizingthe uncertainties associated with long-term events.The closed-lien model is not the only optionavailable to airports with strong fundamental creditcharacteristics. The uncertain nature of PFC revenuecollection and the restrictions under which theauthority to levy PFCs are granted by the FAA canpresent a structural problem; clearly, the airportsponsor would not want to be in a position whereby,because PFC revenues came in faster thanexpected and excesses were spent on eligible projects,the authorized amount was reached beforemeeting all the PFC debt service requirements.However, it is possible to keep the lien open anduse excess PFCs for other eligible projects, providedthat certain legal covenants are incorporated intothe indenture. Essentially, the airport shouldcovenant to review quarterly—or, at a minimum,annually—the amount of PFC revenues availableunder the authorization and not spend PFCs outsidethe bond indenture if it would cause theremaining amount authorized to be collected to fallbelow the remaining cumulative PFC debt serviceor amounts needed to redeem bonds. To guardagainst this the indenture will typically include a1.05x sufficiency covenant for the airport to adhereto. Funds restricted and held could be used to calldebt or establish an escrow to pay debt service asper the originally scheduled amortization after therevenue limit has been reached.If an airport demonstrates strong fundamentalcredit characteristics, structural provisions—such asearly redemption—could permit scheduled debtservice to extend beyond the date at which PFCsare authorized.If the lien is left open, the additional bonds testtypically mirrors the coverage outlined above andhistorical coverage of future debt service requirementsof 1.35x-1.75x for O&D airports and 1.50x-2x for connecting hubs is characteristic.Finally, Standard & Poor’s will accept a very limitedelement of projected PFC revenues eligible tomeet the additional bond test. Essentially, projectedPFC revenues can be adjusted to reflect changes inthe PFC amount or reasonable projections of PFCrevenues based on a consultant’s report. However,the additional bonds test multiple is typically met inevery year of the forecast, beginning with the subsequentyear, therefore limiting the projected elementto one year.FAA Record of DecisionCritical to the rating is the FAA’s record of decisionor final agency decision, signed by airport management,which is the official approval document andsets forth projects that can be funded with PFCs, aswell as the total dollar amount that can be collected.For PFC stand-alone transactions, upon request, theFAA includes language in the record that outlinesthe “informal resolution process” to be followed,before commencement of formal FAA revocationprocedures, for the purposes of resolving potentialcompliance federal regulations problems and/or suspectedmisuse of PFC revenues. Under the record,the airport and the FAA must agree to recognize theFAA as a third-party beneficiary under the Indentureof Trust, which permits the FAA to take actionsredirecting the flow of PFC revenues in the event ofsuspected violations. The informal resolutionprocess could extend up to 360 days before commencementof the formal revocation process, whichcould last an additional 270 to 360 days. Any violationthat has occurred since the inception of the PFCProgram has been resolved through the informal resolutionprocess. In most cases the violation was aproject not being implemented in a timely fashion.Corrective action taken by public agencies in theseinstances was either revising the project scheduleand adhering to it or deleting the project. Giventhese protracted notification periods and strongmanagement, termination is unlikely.Airline BankruptcyOne weakness associated with the collection of PFCrevenues is the fact that PFCs are collected and heldby airlines and remitted to airports on a monthlybasis. Accordingly, there are risks associated withinterruption in the process due to an airline bankruptcyor investment loss by the airline beforeremittance to the airport. To date this has notproved to be a credit concern. In general, exposureto this risk should be limited by proper collectionand administration procedures, reducing theamount potentially owed by the remitting carrier to30 to 60 days of PFC receivables, depending upon138 Standard & Poor’s Public Finance Criteria 2007